Fund managers are rushing to raise European distressed-debt funds as the value of non-performing bank loans in Europe and the amount of capital devoted to the distressed sector in the region reach record highs.

Investors pile into European distressed debt

By the end of October, non-performing loans in Europe held by banks had reached €1.2 trillion, up by nearly €100 billion on the same period last year, according to data from PricewaterhouseCoopers. The uptick was largely driven by increases in Italy, Greece, Spain and Ireland, the accountancy firm said.

Firms including Fortress Investment Group, Alchemy Partners and Strategic Value Partners are in the process of raising funds to add to the $15.4 billion of unspent capital focused on distressed investment in Europe, which is already at its highest-ever level, according to data provider Preqin. Fortress has raised €648.3 million for its fund, which will target non-performing loans in Italy, according to filings with the US Securities and Exchange Commission, while Alchemy Partners is targeting €600 million for its third investment fund, according to a person familiar with the matter.

Meanwhile, Babson Capital Europe is raising €250 million for its Babson Capital Global Distressed Credit Fund and Cardinal Capital Group is targeting €300 million for an Ireland-focused fund, according to research from Preqin and a person familiar with the matter.

This is in addition to other funds that are already being raised, such as one by Strategic Value Partners, which reached a first close of $322 million towards its $1 billion target last month. Kohlberg Kravis Roberts last week said it raised $2 billion for its global special situations fund, which has already invested in Europe.
All firms declined to comment or did not return calls.

The demand comes in response to high levels of unhealthy bank loans, particularly in some of the continent’s struggling economies. An SVP investor report about distressed opportunities, seen by Financial News, said: “The distressed opportunity today is heavily weighted towards Europe, where commercial banks are significantly deleveraging through the disposition of troubled assets.

“The European supply of distressed assets is anticipated to continue to grow [because] more institutions are now able to sell troubled assets due to government assistance, and many of these banks are in the early stages of their disposition programs”. The firm added that most opportunities were in the middle market.

The distressed specialist said that bailout programmes across Europe would put pressure on “capital-constrained institutions to eventually sell” and added that the “stagnant European economy” and regulatory pressures would also contribute to more opportunities for investment in Europe.